EPR Properties Mindful of New Opportunities, But Focused on Core Businesses

3/19/2014 | By Sarah Borchersen-Keto

EPR Properties president and CEO David Brain

As EPR Properties (NYSE: EPR) continues to build its diverse portfolio of properties, the specialty REIT is also looking to capitalize on other property sectors undergoing a transformation.

EPR Properties holds assets in areas such as entertainment, recreation and education. In an interview with REIT.com, David Brain, EPR Properties president and CEO, said that when it comes to exploring new investment options, “the modus operandi is the important thing, not necessarily the property type or use type” for his company.

That strategy explains how Kansas City, Mo.-based EPR Properties has expanded its portfolio from its original focus on the movie theater business to its involvement today in ski parks, golf entertainment complexes, charter schools and more.

“We look at all the different spaces to see if we think there’s a new generation of emergent properties worthy of our attention,” said Brain.

FBR Capital Markets analyst Daniel Altscher noted that EPR Properties would likely be interested in property types that focus on the consumer and “niches where other people don’t want to play, or may not understand the underlying yields and cap rates that can be achieved here.”

Although EPR Properties does face competition for assets from other players such as National Retail Properties (NYSE: NNN) and Spirit Realty Capital (NYSE: SRC), no other company shares its unique combination of assets.

“There’s no one quite like EPR (Properties) on a stand-alone basis,” said FBR’s Altscher.

For the near term, however, Brain stresses that EPR Properties will be fully occupied with its existing activities: “We’ve got a lot to do right now in what we’ve got going.”

Development Evenly Split Between Three Divisions

Development within EPR Properties’ entertainment, recreation, and education divisions will be evenly split in 2014. Development spending for the company in 2014 is expected to total between $500 million and $550 million, compared with about $400 million in 2013.

Development will focus on build-to-suit projects, Brain stressed: “We like to invest at the early part of a new generation of properties in an industry—it’s the heritage of megaplex investing in cinema.” EPR Properties was launched by movie theater chain AMC Entertainment Inc. in 1997 in order to fund the expansion of its megaplex cinema operations.

EPR Properties’ investments are typically structured as triple-net leases, which place the operating responsibilities and costs on the tenants. Brain notes than an important aspect of how EPR Properties functions is its close relationships with operators.

“We like to control the development process,” he said. “We like to be a single-stop shop for these guys. We even fund construction.”

Box Office Receipts Higher; Plans for New Gaming Resort Announced

Turning to developments in its original core – cinema – Brain noted that growth continues to move in line with demographic trends. EPR Properties is projecting that box-office revenue growth of 2 to 4 percent will continue, alongside the opportunity for boosting ticket prices. .

“Although people talk about the escalating price of movie tickets, relative to production values, the price of tickets does not go up nearly as fast as the investments in the productions,” Brain observed.

Meanwhile, the expansion of amenities such as lounge-type seating and the introduction of alcohol sales have enabled theaters to entice the 40-to-60-year old cohort, a group that typically doesn’t turn out to the movies in droves.

“A lot of very good things are happening to raise box office receipts,” Brain said. “It’s a very healthy picture at the movie theater.”

In the recreation segment, EPR Properties and co-developer Empire Resorts, Inc. have announced plans to build a new destination gaming resort in the Catskills Mountains region of upstate New York. The $750 million development, known as Adelaar, has essentially all of its approvals and permits in place to commence construction immediately. It’s now waiting on the awarding of a destination gaming resort license to Empire.

Elsewhere in recreation, Brain noted that attendance at his company’s ski parks was up about 18 percent through the President’s Day holiday, “so we’re running well ahead of last year.”

Venturing into Private School Territory

EPR Properties is also finding new opportunities within the education sector, where it focuses primarily on charter schools. The company has also invested in early childhood education, which it considers an emerging category, and is testing the waters in private school education.

“There is clearly demand for education outside of the traditional public school model,” Brain observed.

EPR Properties is working with charter school operator Basis Independent Schools to open two tuition-based schools in Brooklyn, N.Y., and Palo Alto, Calif. EPR Properties is anticipating tuition will be in the range of $20,000. The schools are due to open for the 2014-2015 school year. Brain noted that both locations have shown high demand for quality education.

“We think it’s a very viable market, and we’re going to continue to look and explore that,” Brain said.

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